Stunning U.S. and global financial markets Sept. 19, Federal Reserve Board Chairman Ben S. Bernanke put “tapering” QE3 on hold, refusing to change the Fed’s $85 billion a month bond-buying program. Meeting on Pennsylvania Avenue in Washington, D.C., the Fed’s Open Market Committee decided to keep the Fed’s cheap interest rates and bond buying intact, after watching mortgage interest rates jump a full percent overnight when Bernanke testified July 18 in the Senate Banking Committee that he might curtail QE3 in September. While believed generally good for stocks, Beranke’s decision reminds market that the U.S. economy remains a razor’s edge from recession. Calling Beranke’s decision not to taper ‘the result of a needless miscommunication,” University of Michigan economist Justin Wolfers blasted Benake’s July 18 comments that caused investors to start dumping bonds, causing mortgage interest rates to jump overnight.
When the front-runner for Bernanke’s job former Clinton Treasury Secretary Larry Summer bowed out Sept. 17 citing unwanted controversy, the stakes were raised to pick Bernanke’s successor. While prevailing wisdom gives the nod to 67-year-old Fed Vice Chairwoman Janet Yellin, the White House may pressure Bernanke to stay. Since the 2007 Great Recession, Bernanke’s been credited with the “soft landing” that kept the economy plunging into a double-dip recession. While criticized by some conservatives and liberals for QE3, most economists credit Bernanke with spurring Wall Street and saving the U.S. economy. Facing a new debt ceiling crisis, President Barack Obama said Sept. 17 the debt ceiling was “no bargaining chip,” rejecting the rumblings in GOP circles that they would insist on de-funding Obamacare or shut down the government. Conservatives blame Bernake for adding $920 billion a year to the national debt.
Without QE3, the U.S. economy would have spiraled into recession causing double-digit unemployment and massive federal deficits. Since Beranke began QE1 in 2008, the Fed’s added about over $4 trillion to the national debt, prompting House and Senate conservatives to cry foul. Conservative economists often accuse Bernanke’s QE1, QE2 and QE3 of doing nothing to improve the economy other than adding to the national debt. When mortgage interest rates hit rock-bottom lows last year, it fueled a nationwide recovery in real estate, prompting a steady increase in consumer spending. Whether conservative or liberal, most economists know that the consequences of ending QE3 prematurely could drive long-term interest rates up, slow or stop the real estate recovery and damage the nation’s Gross Domestic Product. When Obama took office in 2009, federal budget deficits were approaching $1.4 trillion. They’ve been cut-in-two since QE3.
Blasting Beranke for continuing QE3, Chris Low at FTN Financial accused the Fed Chairman of sending mixed messages. “Despite Beranke’s effort yesterday, in the press conference to paint the FOMC decision as entirely consistent with earlier communication from the FOMC, it was not,” not recalling that Beranke always said “tapering” would be contingent on economic recovery. Adding 169,000 jobs in August, the economy missed by about 20,000 the number needed to see a possible tapering in QE3. “The Fed may have done the right thing for the economy . . . but the Fe’s communication credibility is shredded,” said Low, refusing to see the sluggish jobs market changing Bernanke’s mind. While unemployment’s at a five-year low of 7.3%, it could tick upward quickly if the economy sinks back into recession. Bernanke’s QE3 will come back into focus once the White House and Congress debate an extension of the debt ceiling next month.
Expecting global stock markets to rally, Beranke’s decision on QE3 threw cold water on the current U.S. Gross Domestic Product of 2.5%. Had Beranke decided to “taper,” it’s entirely possible that Third Quarter GDP could drop precipitously. Lower than expected jobs growth hints at higher unemployment and less GDP growth heading into Q4. Instead of bowing to pressure from Wall Street or Capitol Hill, Beranke coldly looked at the data and decided that the U.S. economy could not take another interest rate shock from tapering QE3. Whatever side effect from increasing the debt ceiling, it’s far worse than watching slower jobs growth, lover GDP and less government tax receipts. Whatever the risks of too much stimulus, there’s far greater risks to the economy from driving interest rates higher, casing Wall Street to sell off and watching more company layoffs. Expected problems with the debt ceiling could hurt the economy going forward.
Bernake’s decision to hold off on “tapering” QE3 signals that the economy’s too weak to start reducing stimulus. While some economists grumble about the national debt, it’s better to be safe-and-sorry when it comes to messing with the U.S. interest rates. Blasting Beranke for keeping the pedal-to-the-metal when it comes to economic stimulus shows little regard for the U.S. economy. Those saying it’s better to let the economy go “cold turkey” haven’t a clue about how close the economy is to a double-dip recession. When Obama says the debt ceiling isn’t negotiable, he’s really saying he won’t let the GOP-dominated House de-fund Obamacare to reduce the national debt. “The economy has not pulled away from the its near two percent growth rate in recent years,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. Holding off on “tapering” QE3 shows Wall Street the economy still isn’t out of the woods.
About the Author
John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He’s editor of OnlineCoilumnist.com and author of Dodging The Bullet and Operation Charisma.